Preview of budget planning for State of Ohio

Surprises aside, the biennial budget proposals already announced by Gov. John Kasich will be enough to keep lawmakers plenty busy starting early next month, when his latest spending blueprint is slated for public unveiling.

Much of the speculation thus far has centered on Mr. Kasich's plan to revamp education policy. But the governor has also positioned his administration to make advancements, with the expected assistance of the GOP-dominated legislature, on a handful of other high-profile policy areas.

In each case, Mr. Kasich has been fairly clear with his intentions, and his budget director recently confirmed in an interview that the Republican's second two-year appropriations measure would incorporate statutory proposals to further those aims in the near term.

Office of Budget and Management Director Tim Keen,for example, said the K-12 funding plan would "efficiently target state resources to those districts with a lesser local capacity to raise revenue" and "try to take into account the different types of students that school districts educate...."

Primary and secondary education, however, is just one piece of the budgetary puzzle that legislators will have to solve over the next five months or so.

"There are five major pieces of policy that are in this," Mr. Keen said. "There's tax reform, there's school funding and associated policy changes, there is the higher education funding formula, there is Medicaid, which has lots of subpoints, and then there's the turnpike.

"Clearly there will be lots of other good stuff in here, but those are the five major elements of the proposal."

Tax Policy: Mr. Kasich, who once championed the elimination of Ohio's income tax, has made no secret out of his desire to see rates reduced as part of his budget package.

"We are going to have a comprehensive tax reform proposal that is going to help the governor achieve his objective of trying to reduce the personal income tax rate," Mr. Keen said. "We have very high marginal income tax rates, particularly when you consider the addition of the municipal income taxes, and that puts us at a competitive disadvantage with the region and the country.

"The income tax structure in this state is the area where we are at the most uncompetitive, and the governor has clearly stated his view that we need to work to reduce the personal income tax rates. We have put together a tax reform proposal that allows us to make progress on that front."

If recent budgets are any indication, the governor's plan will also touch on many other aspects of the state's tax code. Among the issues stakeholders are watching out for in that arena is the return of Mr. Kasich's proposal to increase severance taxes on the oil and gas industry - a concept that House Republicans rejected immediately when it emerged in last year's mid-biennium budget review package.

Turnpike Bonds: Among the first major issues the 130th General Assembly faces will be the governor's bid to monetize the Ohio Turnpike by issuing bonds backed by toll revenue.

That proposal, unveiled last month, is to be part of the transportation budget, which is separate from the general revenue funded operations budget and traditionally placed on a faster track due to the requirement that it be enacted by March 31for bonding purposes.

The plan entails the issuance of $1.5 billion in toll-backed bonds that the administration maintains will be crucial to fulfilling the state's unmet infrastructure needs.

"The identified list of major construction projects in this state significantly outstrips the resources that are available to us, and transportation projects are critical to economic growth in this state," Mr. Keen said.

"Therefore, the governor believes we need to take advantage, we need to fully utilize the resource of the Ohio Turnpike to generate revenue to advance important projects in northern Ohio and elsewhere across the state. The turnpike-related money is going to be targeted in northern Ohio and it's going to allow us to accelerate projects that otherwise wouldn't be done for years."

Medicaid: Already comprising some $19 billion of Ohio's annual budget, the state's spending on the Medicaid entitlement is poised to expand considerably in the upcoming budget and threatens to muddy Gov. Kasich's mantra of limiting government growth.

That's in part due to the fact that federal matching Medicaid dollars are currently reported in the state budget as GRF - an anomaly of sorts that has persisted for years and across various administrations.

Especially if the administration goes ahead with the expansion of eligibility under the federal Affordable Care Act - as most Statehouse observers expect - the GRF will balloon over the next biennium unless the administration creates a new line item to differentiate the funding streams.

Regardless of whether the state opts for expansion, the current estimate of the fiscal impacts from people already eligible who are expected to join the rolls due to the ACA is about $700 million in calendar years 2014 and 2015. (The budget will include updates estimates for the so-called "woodwork effect," Mr. Keen said). However, with the federal government picking up the entire tab for the new enrollees under the expansion, another $4 billion annually would be added to the state's Medicaid outlay.

Mr. Keen declined to comment on the prospects for expansion. However, the heat was turned up this week with the release of a report predicting savings for the state, and a growing number of groups - including some such as chambers of commerce that traditionally lean Republican - are coming out in support.

"If you look at the environment as we prepare this budget, one of the factors is the federal law, the implementation of the ACA at the national level. Without regard to any decision the state makes about expansion, there are significant impacts to the state for ACA implementation," Mr. Keen said.

"The woodwork effect comes into play. There are individuals who are eligible under the program as it exists. The general expectation is that we will have a greater take-up rate because of everything that's going to be going on nationally with regard to the ACA. The state is responsible for those costs and those costs are not insignificant."

The OBM director noted the ACA also calls for increased doctor reimbursement rates.

Aside from answering the expansion question, the state budget is expected to address Medicaid in a myriad of other ways.

Mr. Kasich has already announced, for instance, his intention to condense the administration of the program into a single state agency - an idea that has been kicked around the Statehouse for several years. The governor has also stated his intentions to merge two agencies that deal with Medicaid: the departments of Mental Health, and Alcohol and Drug Addiction Services.

"We're working on creating a free-standing Medicaid office and that will be in this proposal," Mr. Keen said.

"We're going to have a number of proposals to continue the reform work of the Office of Health Transformation to try to improve the Medicaid program - both the health outcomes and program delivery. Obviously with Medicaid there is a need to work to contain costs. We will continue some of these broader health transformation agenda items that go beyond Medicaid that effect health care delivery.

Mr. Keen said the general thrust of the governor's Medicaid package would be "to continue to build on (OHT Director Greg) Moody's work with the health care industry and other health care entities and...health care payers."

Higher Education: While some details were lacking during a recent event held to highlight an agreement among higher education officials, a new funding formula that like the new K-12 formula will be output-based, or "performance-based" is planned for colleges and universities.

"We have received the report of the Higher Education Funding Commission led by (Ohio State University President E.) Gordon Gee, and we're going to incorporate the work that they've done in the executive budget proposal that we will lay out in a couple of weeks," Mr. Keen said.

"The governor is very excited about a proposal that will...set up a mechanism to encourage student graduation. I think when we provide resources based on graduation, it creates incentives for the universities to increase their graduation rates."

Aside from the five major areas outlined by Mr. Keen, the budget is also expected to entail dozens of other policy changes that will inevitably bring along their own constituencies.

Among the proposals that stood out in the agency budget requests submitted to OBM, for example, was the Department of Rehabilitation and Correction's plan to shutter a small prison currently housing older inmates: the Hocking Correctional Facility in Nelsonville.

Budget Climate/Legislative Outlook: Despite the challenges presented with the proposed policy overhauls, federal law changes and other factors, the upcoming budget cycle differs greatly from the one faced two years ago, when policymakers had to piece together a budget absent billions in federal stimulus funds that had run out.

The state is on much firmer financial footing, as the improving economy brought with it a recovering revenue stream that allowed the administration to start rebuilding the "rainy day" Budget Stabilization Fund.

"Remember where we've been," Mr. Keen said. "Two years ago...significant structural imbalance created by the use of one-time resources in the prior budget period necessitated a very aggressive budget-balancing strategy amidst the slowest economic recovery since World War II."

"Because we used appropriately conservative revenue estimates, we were able to manage through this fiscal year '12 and '13, and we haven't had to revisit this budget. We have a structurally balanced budget. Nevertheless, there are challenges as we move forward; the economy continues to be growing at a very sluggish pace, we have these ACA implementation issues that create budgetary pressures, we want to try to roll out the new funding formula for primary and secondary schools."

"It is the governor's desire to have all the agencies take a very careful look at their operations and the programs they administer and try to have the most efficient and effective operation and efficient and effective program delivery," the OBM director continued. The aim is to "try to make appropriate changes to programs so that we can generally restrain the growth of state government."

"There is going to be a whole series of program improvement amendments...to try to make state programs work better and more effectively serve the citizens - and to try to do it at the lowest possible cost. The lowest possible cost government translates into economic competitiveness for Ohio, which translates into a growing economy and increased jobs."

Rep. Ron Amstutz(R-Wooster), chairman of the House Finance & Appropriations Committee, said despite the heavy policy lifting anticipated with the governor's second executive budget package, he likened it to being at "two-thirds" or "three-fourths throttle" compared to the 2011 version. That budget, among other things, significantly reduced state revenue-sharing with local governments as a key offset to the loss of nonrecurring federal funds.

"I don't think it's going to have some of the challenges that the last budget did, but it will have some new ones," the lawmaker said. "It probably isn't going to shake the earth as much as the 2005 tax reform package did, but...it's going to be a lot."

Rep. Amstutz said that while he expected the latest "tax reform" provisions to be reviewed separately by the House Ways & Means Committee as well as his finance panel, it would be "up for discussion" as to whether other components were also split out for review by other standing committees.

It's fairly common to have the standing tax panel review related components of a budget, he observed. "I expect that's going to happen here. I'd be very surprised if we didn't use the Ways & Means Committee to some extent here to help us vet the tax parts."

While the House has taken the lead on the push for uniform municipal taxes, Mr. Amstutz said he wasn't sure whether that would become part of the budget discussion or be included in the governor's overall spending plan.

"I do think it will be an issue that will be addressed" at some point in the session, he said, adding that it could be enacted concurrently with the other budget changes.

"It depends on how the package is constructed as it goes into gear, because that is a discreet revenue stream that goes into municipalities. It isn't something that directly interacts with the state budget, but potentially it could," he said.

Mr. Amstutz also raised doubts as to whether the administration would revisit another major tax debate from two years ago - the phase-out of commercial activity tax reimbursements to local entities that lost revenue when the tangible personal property tax was eliminated.

Mr. Kasich initially proposed a complete phase-out of the CAT payments, but the legislature limited it to two years. As a result, 50% of the CAT revenue now goes to the GRF and the other half is still channeled to locals - mostly to school districts.

"If I were going to guess, I'd say maybe not - but that would be a guess," Rep. Amstutz said in regards to further reimbursement cutbacks.

"I'm not sure I would be about avoiding the fight," he said. "It would be recognizing that we do a lot of our services in Ohio through our local government partners, so we have to determine what their funding needs are. And that's a complex equation in Ohio because townships are a lot differently funded than municipalities, and the small ones are a lot different than the larger ones so there's a lot of things to think about when you're changing funding streams."

Senate President Keith Faber (R-Celina) shook things up much further by announcing that unlike in recent years when the Senate Finance Committee reviewed the budget as a whole he would create three subcommittees that include members who don't serve on the main panel. The new subcommittees will separately review policy for health and human services, education and general government.

Sen. Tom Sawyer (D-Akron), the ranking minority party member on the Senate Finance Committee, endorsed Sen. Faber's revamped budget review plan to create new budget subcommittees that include members who don't sit on the Finance Committee.

"In the past, an enormous amount of substantive work has been driven through the budget, and that clearly is going to be the case again," he said in a recent interview. "But breaking up that substantive work into discreet disciplines, I think, will facilitate the work of the legislature and make it possible to do that work in a much more effective and efficiently."

"As with any experiment, sometimes the first example of a new idea is surpassed by the last example of an old one, but I think this really has promise," he said.